We study the distribution and properties of valuation errors yielded by banking industry multiples for European and U.S. banks. The results highlight that stock-market multiples are best suited for U.S. institutions, and that a two-year-forward P/E is the most precise metric. Contrary to practitioner beliefs, P/tangible book value is less meaningful than P/BV. Multiples are less accurate for small commercial banks than for large ones, and for investment banks than for retail banks. We investigate whether large positive errors lead to one-year positive price performances and negative errors to negative price changes, and find that the forward P/E loses its predictive ability in comparison with historical multiples. Testing three investment strategies, we find that bank multiples can be profitably used in portfolio choices.

Forte, G., Gianfrate, G., Rossi, E. (2020). Does relative valuation work for banks?. GLOBAL FINANCE JOURNAL, 44, 1-25 [10.1016/j.gfj.2018.09.002].

Does relative valuation work for banks?

Forte, G
Primo
Membro del Collaboration Group
;
Rossi, E
Ultimo
2020

Abstract

We study the distribution and properties of valuation errors yielded by banking industry multiples for European and U.S. banks. The results highlight that stock-market multiples are best suited for U.S. institutions, and that a two-year-forward P/E is the most precise metric. Contrary to practitioner beliefs, P/tangible book value is less meaningful than P/BV. Multiples are less accurate for small commercial banks than for large ones, and for investment banks than for retail banks. We investigate whether large positive errors lead to one-year positive price performances and negative errors to negative price changes, and find that the forward P/E loses its predictive ability in comparison with historical multiples. Testing three investment strategies, we find that bank multiples can be profitably used in portfolio choices.
Articolo in rivista - Articolo scientifico
Banks; Relative valuation; Banking multiples; Equity valuation; Valuation errors
English
11-set-2018
2020
44
1
25
100449
partially_open
Forte, G., Gianfrate, G., Rossi, E. (2020). Does relative valuation work for banks?. GLOBAL FINANCE JOURNAL, 44, 1-25 [10.1016/j.gfj.2018.09.002].
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10281/220631
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